Criminal executives to pay the price

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Ignorance will be no defence for wrong-doing by company chiefs,
reports Kurt Eichenwald.

The conviction of Tyco's Dennis Kozlowski on charges of grand
larceny and conspiracy and the jail sentences handed out on Monday
to Adelphia founder John Rigas and his son Timothy are underscoring
what legal analysts say is the most surprising consequence of the
explosion in corporate pay during the 1990s.

That is, a heightened expectation that executives know how to do
their jobs and understand what is happening at their companies.

Indeed, coming after the convictions of other top executives -
including Bernard Ebbers, the former chief executive of WorldCom,
on charges of accounting fraud - the Kozlowski verdict demonstrates
that, at a criminal trial, high pay scales can serve as the
government's Exhibit A of the defendant's potential knowledge of
wrongdoing.

"One of the perils of being paid an enormous amount of money is
that people will ultimately conclude that you're worth it," said
Robert Mintz, a former federal prosecutor. "The assumption jurors
will reach is that somebody who receives large compensation is
playing a critical role at the company, and a defence that you were
more cheerleader than ringleader is going to be very difficult for
a jury to buy."

At his trial, Mr Kozlowski - who in the 1990s was celebrated as
one of corporate America's most aggressive deal makers and who had
come to personify the company he had transformed - portrayed
himself in his testimony as something of a slipshod, from-the-hip
manager.

Tens of millions of dollars in payments to him, Mr Kozlowski
testified, had been approved by the board and were discussed
informally with a single director, since deceased.

He claimed he failed to pay taxes on the money because he had
relied on his accountant and therefore had not been paying
attention.

With their verdict, the jury rejected those arguments.

"There is an inconsistency between someone who takes the
position that he built a company from scratch but forgets certain
things that jurors find important and material," said Ira Lee
Sorkin, another former federal prosecutor. "They are going to
wonder how anyone could have risen to the top of the world, earned
justifiably the pay and not known what was going on."

Mr Kozlowski's co-defendant, Mark Swartz, Tyco's former chief
financial officer, fared no better with his defence that he
believed the money he had received from Tyco had been authorised.
Mr Swartz was also convicted.

The two men were charged with stealing $US150 million ($193.4
million) from Tyco, a conglomerate whose products range from
security systems to health care devices, and taking in $US430
million more by secretly selling company shares while inflating the
value of the stock.

The defence of ignorance or foolishness has been widely derided
as difficult to believe. But legal analysts said that, given the
circumstances of the cases, the defendants were hard pressed to
argue anything else.

Similarly, in the WorldCom case, with the former chief financial
officer, Scott Sullivan, testifying about his role in that
company's accounting fraud, it was impossible for Mr Ebbers to
argue that wrongdoing did not occur. Ignorance and sloppiness were
the only defences left.

The compensation that has come back to haunt corporate
executives would be hard for most wage earners to comprehend. In
addition to the amount he has been convicted of stealing, Mr
Kozlowski was paid hundreds of millions of dollars in salary and
bonuses, including more than $US70 million in 2002.

The payments to Mr Ebbers of WorldCom were also colossal. Not
only did they include tens of millions of dollars in salary and
bonuses, but the company also provided him with about $US400
million in loans. At his criminal accounting fraud trial, Mr Ebbers
testified that he was not intimately familiar with the operating
financial details of the company that paid him so generously - a
position that was rejected by the jury.

But staying off the witness stand proved to be of no benefit to
Mr Rigas of Adelphia. His lawyers argued that at 79, he was too old
to understand some of the financial machinations within the company
he headed; the jury rejected that argument.

There is a lesson in this. Executives who want the big pay had
better turn in spectacular, precision performance. Otherwise, if a
scandal blows up inside the company, their own compensation may
prove their undoing.

"Any highly paid corporate executive had better move swiftly to
make sure they have a firm grasp on the finances of their company,"
Mr Mintz said. "Because at the end of the day, these cases go to
show that they are going to be held to a very high standard that
may come back to haunt them."